For example: a father who has run a business in Melbourne for twenty years bought several investment properties through a family trust. His daughter later moved to Singapore for work and his son settled in Hong Kong, and the trust deed defines beneficiaries very broadly, covering “all relatives and companies they control”. When he goes to buy another home in the trust’s name, he discovers that for Victorian tax purposes the trust may already be treated as a “foreign trust”, attracting substantial surcharge duty and land tax.
For families whose children and relatives are spread across Australia, Southeast Asia and Greater China, this is not unusual. This article explains how family trusts work, how Victoria’s foreign surcharges apply to trusts, what a testamentary trust can do, and who controls the trust after the founder dies.Tax calculations and lodgements must be handled by your accountant or tax adviser. This article covers the legal side only.
1. How a family trust works
What Australians call a “family trust” is usually a discretionary trust. The trustee holds assets under the trust deed and, each financial year, decides at its discretion which beneficiaries receive income and capital. Beneficiaries generally have no fixed share, only the possibility of receiving a distribution.
Another key role is the appointor: the person who can remove and appoint the trustee. Because the trustee decides how the assets are used, the appointor holds ultimate control of the trust. Trust assets do not belong to any individual, so theydo not pass under anyone’s will— a point that matters greatly for succession planning, as discussed below.
2. Victorian surcharges: a trust can be a “foreign trust”
Victoria imposes foreign purchaser additional duty (FPAD) of 8% on acquisitions of residential land by foreign purchasers, on top of ordinary duty. Since 1 March 2020, the State Revenue Office (SRO) has taken the position thata discretionary trust with any potential foreign beneficiary will generally be a foreign trust, whether or not the trustee would ever actually distribute to that person.
While the property is held, the absentee owner surcharge (AOS) on land tax applies at 4% from the 2024 land tax year, on top of general land tax. For discretionary trusts the test differs from the duty test: broadly, it turns on whether an absentee person is a specified beneficiary — one named in the trust deed or otherwise specifically declared in writing. The two surcharges have different definitions, exemptions and notification rules, and each needs to be checked separately.
3. Amending the deed to exclude foreign beneficiaries
A common step is to amend the trust deed to exclude foreign natural persons, foreign corporations and trustees of foreign trusts from being beneficiaries. The SRO accepts that such an amendment can prevent FPAD, provided it isvalidly made before the relevant dutiable transaction occurs. In practice these exclusion clauses are usually drafted to be irrevocable.
Before amending, you need to confirm whether the deed gives the trustee a power of amendment and whose consent is needed; whether the change could be treated as a resettlement of the trust with capital gains tax or duty consequences; and whether the trustee company’s own shareholders or directors are foreign persons. There is also a family trade-off: excluded children overseas can no longer receive distributions from that trust, and may need to be provided for through the will or another structure.
4. Testamentary trusts: a trust created by your will
A testamentary trust is created by a will and takes effect on death, with some or all of the estate held by a trustee for the family. Compared with leaving assets outright to children, its main advantages are a degree of asset protection where a beneficiary faces bankruptcy or relationship breakdown (depending on the circumstances), and flexibility to distribute income according to each beneficiary’s situation each year.
On tax, income a minor receives from a testamentary trust that is derived from estate property can be “excepted trust income” taxed at ordinary rates, rather than the penalty rates that otherwise apply to minors. According to the ATO, however, income from assets transferred to the trust on or after 1 July 2019 that are unrelated to the deceased estate does not qualify. Your accountant should confirm how this applies to you.
5. Beneficiaries overseas: tax points to raise with your accountant
Under Division 6 of the Income Tax Assessment Act 1936, a beneficiary who is presently entitled is generally taxed on their share. But if the beneficiary is a non-resident at the end of the income year,the trustee is taxed on that share on their behalf, and the beneficiary can later claim a credit in their own Australian return. Different categories of income are treated differently, and the beneficiary may also have obligations where they live. This must be worked through by an accountant across both tax systems; our role as lawyers is to make sure the deed and distribution resolutions are legally effective.
6. Who controls the trust after the founder dies?
An appointor’s power is not an estate asset andgenerally does not pass automatically under the will. Succession depends on the trust deed: some deeds let the appointor nominate a successor by will or in writing, some pass the role to the legal personal representative, and some are unclear — fertile ground for disputes between siblings.
If the trustee is a company, its shares and directorships also need planning. ASIC notes that when a sole director and shareholder dies without a valid will, it can take months before an administrator can appoint a new director, and the company may be unable to operate in the meantime. The trust deed, the trustee company’s constitution and the will must be reviewed together so they work as one plan.
Practical checklist
- Locate the original trust deed and every variation, and confirm the current version.
- Check whether the beneficiary definition captures relatives overseas, foreign companies or foreign trusts.
- Before the trust buys residential property in Victoria, confirm whether it is a foreign trust.
- Confirm who the appointor is, how succession works under the deed, and who the trustee company’s shareholders and directors are.
- Align your will, the trust deed and the trustee company’s constitution, and consider whether a testamentary trust suits you.
- Confirm the tax treatment of overseas beneficiaries with your accountant each year.
Frequently asked questions
My children are studying overseas. Does that make our family trust a foreign trust?
Not necessarily. It depends on how the deed defines beneficiaries and whether the child is a “foreign person” or “absentee person” in the legal sense, which turns on citizenship, visa and residence. An Australian citizen or permanent resident temporarily studying abroad may be treated differently from a foreign citizen living overseas, so it needs to be checked case by case.
We have already bought the property. Is it too late to amend the deed?
For a purchase already made, the SRO requires the amendment to be effective before the dutiable transaction, so a later amendment generally will not remove FPAD on that transaction. An amendment may still matter for future purchases and for land tax surcharge, which is assessed year by year, so it is worth reviewing early.
Can I leave the appointor role to my son in my will?
Only if the trust deed allows the appointor to nominate a successor by will. Many people assume a will can deal with everything, but the appointor’s power is governed by the deed. The deed should be reviewed first and, if needed, amended within its amendment power.
Is a testamentary trust right for every family?
Not always. For smaller estates or simple family situations, the administration cost may outweigh the benefits. It tends to suit families with young children, beneficiaries facing relationship or creditor risks, or those wanting to manage family wealth over the long term.
Can you work out the trust’s tax for us?
We give legal advice, not tax advice. We handle the legal side of trust deeds, wills and company documents, and can work with your accountant or tax adviser so the legal structure and tax treatment line up.
A family trust is a long-term arrangement that needs regular maintenance, not a document to file away once signed. Chua Tan Associates has practised in Melbourne since 1990 and can help in Mandarin, Cantonese and English to review your trust deed, handle deed amendments, plan appointor succession and testamentary trusts, and work alongside your accountant. Call us on 03 9602 3988 or contact us online — we can meet at our Melbourne CBD office or by video.
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This article is general information only and is not legal advice.
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